Ria ran a small online bakery business. Her business was doing very well. She saved a good amount of money every month and now wanted to invest it wisely. She was in a dilemma to keep her savings in a bank account or to invest it in the stock market. Her friend Aabha, who had done a certification course from National Stock Exchange, encouraged her to invest in the stock market. She explained to Ria that if she invests in the stock market, she could disinvest and reinvest whenever she wanted, which would provide her good liquidity. Aabha also told her that the membership of stock exchange is well regulated and all trading takes place within the legal framework. As a result, investors get a fair and safe deal.
Ria was still apprehensive as she had heard that there is lot of speculation in the stock market. She wanted to be cautious. Aabha clarified that speculation does exist, but it happens in a restricted and controlled way. She also told Ria that the stock exchange is keen to promote wider share ownership and does so by educating public about investments etc. As a result, young people have started investing in the stock market. After all this discussion, Ria felt confident and decided to invest a part of her savings in the stock market.
Quoting lines, identify and explain the four functions of stock exchange highlighted in the above case.
Ria ran a small online bakery business. Her business was doing very well. She saved a good amount of money every month and now wanted to invest it wisely. She was in a dilemma to keep her savings in a bank account or to invest it in the stock market. Her friend Aabha, who had done a certification course from National Stock Exchange, encouraged her to invest in the stock market. She explained to Ria that if she invests in the stock market, she could disinvest and reinvest whenever she wanted, which would provide her good liquidity. Aabha also told her that the membership of stock exchange is well regulated and all trading takes place within the legal framework. As a result, investors get a fair and safe deal.
Ria was still apprehensive as she had heard that there is lot of speculation in the stock market. She wanted to be cautious. Aabha clarified that speculation does exist, but it happens in a restricted and controlled way. She also told Ria that the stock exchange is keen to promote wider share ownership and does so by educating public about investments etc. As a result, young people have started investing in the stock market. After all this discussion, Ria felt confident and decided to invest a part of her savings in the stock market.
Quoting lines, identify and explain the four functions of stock exchange highlighted in the above case.
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Solution and Explanation
A stock exchange is an institution that provides a platform for buying and selling existing securities. It also regulates and controls such dealings.
The case shows four of its functions. We quote the lines and explain each.
Step 2: Function 1: Providing liquidity and marketability:
Quoted line: "she could disinvest and reinvest whenever she wanted, which would provide her good liquidity".
A stock exchange lets investors sell shares and buy others at any time. This gives liquidity (ease of converting to cash) and marketability to the securities.
Step 3: Function 2: Ensuring safety of transactions:
Quoted line: "membership of stock exchange is well regulated and all trading takes place within the legal framework. As a result, investors get a fair and safe deal".
Only registered members can trade, and they must follow the rules of SEBI and the exchange. So investors are protected from fraud.
Step 4: Function 3: Providing scope for speculation:
Quoted line: "speculation does exist, but it happens in a restricted and controlled way".
The exchange provides scope for speculation within the provisions of law, but only in a restricted and controlled manner. It keeps speculation within limits through rules, so that it does not harm genuine investors.
Step 5: Function 4: Spreading of equity cult:
Quoted line: "promote wider share ownership and does so by educating public about investments".
The exchange takes steps to make more people buy shares, so that ownership of companies spreads widely. Young people investing in the market, as the case says, shows its effect.
Final Answer:
The four functions are providing liquidity and marketability to existing securities, safety of transactions, providing scope for speculation (in a restricted and controlled way) and spreading of equity cult.
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